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annenberg media ♪ annenberg media ♪ 1932. the nation is in the depths of depression. 1/4 the work force is idle. income has been cut in half. banks and businesses are toppling. how long can this depression go on? "the depression can last indefinitely," according to british economist john maynard keynes. but is anyone listening? and can government intervention move us out of these terrible times? keynes and roosevelt met only once. each thought the other well meaning but ineffectual. however, they changed the course of the world.
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what did we learn from the depression? we'll investigate that with the help of economics analyst richard gill on economics usa.
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hard times. we've seen a lot of them over the years. 1932 and the years that followed were different. the hoover administration tried to popularize the word depression. they thought it a milder word that would soothe the american public. by 1932, hope was about gone. the depression was more than an economic problem. it was human calamity. millions went hungry, some to starvation. proud people begged on street corners asking for pennies to feed their children, for jobs that no longer existed. the economic devastation seemed total. things couldn't possibly get worse, and yet they did. over 4,000 banks failed. the value of stocks dropped from $89 billion to $15 billion.
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national income dropped. investment, savings, consumption-- everything plummeted. 14 million people, 1/4 of the work force were without jobs. the agricultural economy, a refuge in earlier depressions, suffered during the 1920s then collapsed in the 1930s. nothing seemed to halt the downward spiral. how did people respond? eric sevareid remembers the anguish of his father's generation. i think the instinct of that generation was to blame themselves. somehow they had not listened to god's word closely enough or hadn't been smart about how they handled the land or loans or something. only later did they begin to blame the government or the system. people have to have scapegoats. they can't feel personally responsible forever. and it was such a vast thing anyway,
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something fundamentally broken down. we were plowing under food, killing little pigs, and people were going hungry. millions of sick people and doctors going broke. what was going on? what was the sense to this-- this rich country? politicians of 1932 were prisoners of the economic theories of the day that held the economy would improve. that's the message president hoover kept delivering. in cambridge, england, john maynard keynes was telling students the american economy would get worse. people lost jobs and stopped spending. as they stopped buying, stores stopped ordering. more factories closed. more jobs were lost. more stores and businesses failed-- a vicious downward spiral. we were increasingly convinced, because the depression went on,
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that former economists' belief that the boat automatically righted itself was wrong. it wasn't a rocking boat. it was something else. what keynes suggested was that the metaphor was not a boat. it was more like an elevator which ordinarily ran up and down but could stall. there was something in-- that the system had no automatic, self-regulatory device. that appealed to us because we didn't see any automatic self-righting of the elevator back to floor one. it's a bitter irony that virtually everything the hoover administration tried only made things worse. both republicans and democrats believed in a balanced budget. by 1932, the budget was so far out of balance that a revenue bill cut government expenditures
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and imposed a huge tax increase. the people laughed bitterly and called their shantytowns hoovervilles. finally the president was driven to a dramatic about-face. he authorized creation of the reconstruction finance corporation to pump $2 billion into the economy. the rfc was a milestone, a major government involvement in the economy. large industries and financial institutions could turn to the rfc for capital. this bold step didn't work. why not? it was unsuccessful because, well, i'd say if you were involved in an avalanche and it had tremendous momentum and you put up a barrier that was impossibly moderate or modest compared with that onward force, it couldn't stop it very well. the depression had become so deep,
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the slide so precipitous, and the decline in business so great that pouring money into the businesses to start new projects wasn't working. the problem was that the demand for goods and services wasn't there. but by 1932, millions of americans were broke, hungry, and homeless. millions more watched their lifesavings disappear as banks toppled like dominoes. in 1929, americans had saved almost $4 billion. in 1932, savings dried up, which meant no money for investment. as the reconstruction finance corporation showed, businessmen couldn't afford to invest money to produce commodities no one could buy. it took john maynard keynes to point out the obvious truth-- the system wouldn't automatically correct itself. this depression could last a long, long time.
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what did keynes see that the economics world missed? you can understand what was happening in the first years of the depression if you break down our gnp into three main components-- consumer goods, investment goods, and government expenditures. government expenditures didn't change much over this period. but look at the private side. gross investment fell by nearly 90%. notice that consumption also fell during these years by about 1/5. here's where keynes comes in. in previous economic thinking, when one component of gnp fell, another would rise. if people consumed less, they would lend savings to businesses who would invest more. if consumption goes down, investment goes up. if investment goes down, consumption goes up.
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there would be enough total demand to sustain full employment. what keynes pointed out was that both components might be going down, not a little and temporarily, but massively and persistently. this was really a huge idea. namely, the total private demand, demand for both consumption and investment goods, might be insufficient to sustain full employment. this total demand might be so weak that we might have what we did have-- the great depression. talk of revolution filled the air in the 1930s. the debate raged hottest on college campuses. surprisingly, the idea that changed the nature of capitalism forever came not from the left, but from t the right. not from those who would vanquish capitalism, but from a man who would vindicate capitalism.
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he was john maynard keynes. in the 1930s, his ideas spread from cambridge, england, to cambridge, massachusetts, to a generation of young economists waiting to spread the message. franklin roosevelt wasn't a young economist, but the leader of a nation with problems. in 1933, keynes was one among a babble of voices. his letter to the president would go unheeded. john maynard keynes had new ideas about the economy, and he rushed to get them before the public. dr. lorie tarshis, a student at cambridge in 1933, remembers the desperate rush to publish. why did keynes rush? i think the reason was the sense of urgency communicated to him by developments within britain and europe-- in germany where hitler had come to power,
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in the united states where revolution was in the air, and in other parts of europe and in britain, too, where the intellectual class was rapidly moving to the left. he felt he had an answer that was superior to marx as to analyzing capitalism's discomforts, an answer that was not only superior, but much more congenial to him for handling it. john maynard keynes is a truly memorable figure of the 20th century. he married a ballerina, ran an insurance business, and wrote a treatise on mathematical probability. but first and foremost, he was a teacher. the imagination he showed made... his ability to associate something he found interesting with something that had been said that by itself was uninteresting...
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it just stood out. you were in semishock listening to him. i was also impressed by the support and warmth he gave students. for all his brilliance, keynes was a realist and one deeply concerned about the effects of economic theory on everyday life. seeing the world as it was, keynes argued that the depression could last longer than imagined. the general theory of employment, interest, and money, published in 1936, was devastating to traditional economics. not everyone was ready for the theory of aggregate demand or government intervention. i read it and rebelled. it didn't fit in. i was not accepting something just because it was new. so like a seminarian
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fighting, uh... against theology, i rebelled and i rebelled. it was a long period of conversion that lasted about a year and a half. it was a painful effort. keynes said it would be hard to get rid of the old ideas. the new ideas were easy. this was in the general theory's preface. to be a keynesian in 1937, 1938 was to be not able to get a job in an american university. uh... one of my, uh, professors was talking at lunch, and we were talking about certain effects. and he said, "gee, that sounds very sensible. whose ideas are those?" and my friend said, "what do you mean?
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that's john maynard keynes. that's the general theory." the old professor said, "well, now, that's strange. "why is our department so against it if it's so sensible?" funeral by funeral, science makes progress. from cambridge to cambridge, the revolution marched and eventually conquered. keynesian economics swept american universities long before it became public policy in washington. roosevelt had a depression to fight. he had little time for theory. today, we can see that economics and the public policy it generates are fundamentally different because of john maynard keynes. professor gill, what was so revolutionary about keynesian economics? i think what excited academic economists was the idea i mentioned earlier. total demand, demand for consumers' goods
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plus business demand for investment, might not be sufficient to maintain a high level of employment. business investment demand collapsed in the depression. nobody was building new plants. they were already operating with unused capacity. keynes showed that this fall and investment demand might bring down consumers' demand as well. "what determines consumption demand?" keynes asked. basically, the level of income in the economy. if my income is $10,000 a year, i'll spend, say, $9,000 on consumers' goods. if my income is $20,000, i'll spend, say, $17,000. if my income is only $4,000, i'll want to spend only $3,900 on consumption. we can see what happens in the keynesian world when investment falls. this fall brings down income here.
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this in turn brings down consumption. the process doesn't stop here. consumption, according to keynes, ultimately falls by a multiplied amount. suppose a business spends $1 million a year on labor to expand its plant capacity. suddenly, it stops. the income of these laborers is cut by $1 million. let's suppose they would have spent 3/4 of the 1 million on, say, food and automobiles. because of their layoff, there is a $750,000 cut in demand for food and autos. it doesn't end there, for now automobile producers and farmers have less income. their spending on shoes, movies, houses, and singing lessons will be reduced. first the $1 million, then 3/4 of that, then 3/4 of that, until finally the fallen income has become quite substantial.
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let me stress what a shocking idea this was. once the demand for goods starts falling, it doesn't reverse itself. it may fall further. now the economics profession had a way of looking at the great depression that made sense. this caused huge interest in the universities. history has it wrong. roosevelt didn't come to the white house convinced of the need for a keynesian program of public spending to revive the economy. he considered deficit spending a dangerous measure. fdr spent the 1932 campaign declaring his faith in a balanced budget and blasting hoover as a big spender. roosevelt combined his criticism of republican deficits with an appeal to "the forgotten man." in november, "the forgotten man" spoke.
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millions voted for roosevelt and hoped. but in the four months before inauguration, the depression grew deeper. in march 1933, roosevelt was the leader of a nation with 1/4 of its work force unemployed. something had to be done. so first of all, let me assert my firm belief that the only thing we have to fear is fear itself. nameless, unreasoning, unjustified terror which paralyzes the... rosina tucker remembers the hope returning. uh, you remember his saying, "there's nothing to fear but fear itself." he had his fireside talks... and, uh... uh, the people listened to them
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all over the united states. they made it a point to have nothing to do during those fireside talks. they sort of... it seemed to me a sacred time, uh, as if a father was talking to his children who were afraid. it was in that period of despair that roosevelt did one great thing. he experimented. if this didn't work, try something else. this nation is asking for action and action now! march 1933 was the bottom of the depression. slowly the economy inched upwards. keynes visited washington in 1934
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to meet with roosevelt. the meeting was not a success. fdr had such a lack of interest in economics... his interest was not simply zero. it was, if it could be, negative. he was concerned with how things worked, but not analytically. he wanted to have confidence that somebody who was patient could advise him. keynes talked to fdr as though he were a student, and fdr wasn't going to follow the way a student would follow. franklin roosevelt didn't know a lot about economics, but he knew which whiskey wasn't working. he was ready to shop around in a way that herbert hoover, by temperament, could not have done... uh, and try one method or another.
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if the president had little time for keynes' mathematics, he showed interest in numbers that told how many americans were still without jobs. in the first four years, the roosevelt administration launched the nra, ccc, wpa-- a virtual alphabet soup of programs to relieve unemployment. newly employed workers spent more money, creating more jobs. by 1936, it appeared that the depression was ending. it was time for a balanced budget. central revenues are increasing. emergency expenditures are decreasing. a balanced budget is on the way. does that sound like bankruptcy to you? roosevelt won a landslide re-election, but the celebration was brief. he cut spending. in october 1937,
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the stock market took another dive. unemployment began to rise once again. suddenly it appeared that the past four years' progress would unravel. president roosevelt may have been an economic conservative, but he was a social liberal. he saw rising unemployment and responded by resuming government spending. this government intervention stimulated the economy the way keynes had urged since 1933. if franklin roosevelt was not a keynesian, by 1938 he'd surrounded himself with plenty who were. one of those economists was walter salant, a student of keynes turned new dealer. many people were in favor of spending and in quite a few countries. but they never had any answer to the objections by-- of classical theorists. because, uh...
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well, essentially, as somebody has said, facts don't kill a theory. it takes another theory to kill a pre-existing theory. and that was the contribution that keynes' book made in my opinion. it gave the pro-spenders a refutation of the objections of classical theorists. deep in his heart, roosevelt simply didn't trust theories or the economists who invented them. countering a depression by lowering taxes and increasing government spending and doing it continuously was simply too fanciful. it defied common sense. so the government spent a little and the economy improved a little and the country limped into the 1940s as the world began to tear itself apart.
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the german army overran europe. the german air force seemed ready to pulverize britain. the allies turned to the americans for weapons to continue the war. keynes feared the economy wouldn't stand the strain of increased demand. but in washington, his young disciples disagreed. we were more expansionary than he. he thought it was time to put the damper on aggregate demand. we disagreed, partly because our view was that the capacity of the economy to produce was greater than he thought.
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the great depression ended with the vast production of wartime economy. government spending, which frightened roosevelt when it topped $15 billion in 1936, soared above $100 billion during the war. massive government intervention finally brought full production and full employment. why couldn't the private sector have brought us out? what keynes said was, total private demand might not be sufficient to sustain full employment. suppose this is national income when everyone is fully employed. but suppose investment demand plus consumers' demand only equals this level. there isn't enough demand to sustain that level of income. keynes said full employment could be achieved if we added public demand-- government spending on goods and services--
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to make up this difference. suppose we put a "g" for government. according to keynes, everything would be all right. why then didn't roosevelt's spending programs get us out of the depression? according to keynes, they were on too small a scale. roosevelt may have seemed like a big spender to republicans, but to keynes, he didn't do enough. this little bit of "g" obviously doesn't fill the gap. then along came world war ii with a really huge "g." it overfilled the gap. we went on double shifts to meet the new demand for tanks, ships, and planes. this convinced the majority of economists that keynes was right. the problem of great depressions and even the business cycle itself
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seemed to have been solved. you can argue over the causes of the great depression and the relevance of keynesian theory to modern economics, but our economy today is fundamentally different from the system that crashed in 1929. back then, the federal budget totalled less than 3% of the national income. today it's at 25%. there have been other recessions, but nothing like those terrible years in the 1930s. the man whose theories helped us understand the great depression was john maynard keynes. how those theories became public policy will be the subject of future editions of economics usa.
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captioning is made possible by the annenberg/cpb project captioning performed by the national captioning institute, inc. captions copyright 1986 educational film center
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Deutsche Welle Journal
LINKTV February 11, 2013 2:00pm-2:30pm PST

News/Business. International news and analysis. (Stereo)

TOPIC FREQUENCY John Maynard Keynes 9, Keynes 4, Europe 3, Britain 3, Us 3, Washington 3, Franklin Roosevelt 3, Usa 2, Roosevelt 2, England 2, Ccc 1, United States 1, Unreasoning 1, Nra 1, The Work Force 1, Annenberg Media Annenberg Media 1, Dominoes 1, The Nation 1, Ballerina 1, Massachusetts 1
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